Wednesday, December 5, 2007

E*Trade Financial’s in a recent fire sale, sold a basket of asset-backed securities with a book value of $3 billion to Citadel Investment Group for just $800 million.

The case has been made, often persuasively, that E*Trade was getting rid of particularly toxic assets while under duress.

But here is a point worth considering: Only about $450 million of E*Trade’s $3 billion portfolio was made up of the riskiest kinds of securities — C.D.O.’s and second-lien mortgages — that have made headlines recently.

What was the other $2.6 billion or so? In E*Trade’s own words, it was “other asset-backed securities, mainly securities backed by prime residential first-lien mortgages.”

In other words, E*Trade’s enormous haircut went far beyond subprime.

A large part of E*Trade’s basket of assets was securities backed by high-quality mortgages — loans to homeowners with strong credit ratings and reasonably large equity cushions. That could raise troubling questions on Wall Street about the true value of “prime” mortgage assets, especially when they need to be liquidated in a hurry.

The picture becomes clearer when you look at this breakdown, which E*Trade shared with investors in October. It shows that more than $1.35 billion of E*Trade’s asset-backed portfolio consisted of prime, first-lien residential mortgages rated “AA” or better — hardly toxic sludge by any stretch of the imagination.

So analyse this way: Even if E*Trade got nothing — not a cent — for anything but these top-quality mortgage securities, it still sold $1.35 billion in prime mortgage assets for $800 million, or less than 60 cents on the dollar.